Second Quarter 2018 Update
August 21, 2018
Market Performance Summary
Fiscal year 2018 was another exceptionally strong year for PRIM. The PRIT Fund returned 10.0% gross (9.5% net) for the fiscal year, 140 basis points above benchmark, net of fees, and we know of no other fund of our size or larger that outperformed us. Six of seven major asset classes outperformed their benchmarks net of fees. Private Equity returned 19.9% for the year, Global Equities returned 11.7%, Real Estate returned 8.9%, and Timberland returned 7.4%. Portfolio Completion Strategies (PCS), now 13.4% of the total PRIT Fund, returned 6.8% net of fees, 78 basis points above the benchmark while exhibiting low realized volatility of approximately 2.8%.
We evaluate the performance of the PRIT Fund on three equally important metrics: return, risk, and cost. As described above, the returns of each asset class and the entire PRIT Fund were very strong both relative to the benchmarks and in absolute terms, and importantly, expenses and risk remained tightly controlled. Even with the Board-approved, larger allocation in the fiscal year to high-performing, relatively higher fee, actively managed alternative asset classes such as Private Equity and PCS, we are pleased to report that the ratio of total expenses was 53 basis points in fiscal year 2018, compared with 54 basis points in fiscal year 2017. This decrease highlights our continuing efforts related to Project SAVE, as well as our focus on lower-fee separately managed accounts in our PCS portfolio, the success of our Private Equity co-investment program, and new direct Real Estate investments, among other things. Moreover, the 9.5% return of the PRIT Fund for the year was achieved with a realized volatility of 4.3%, producing a very high Sharpe ratio of approximately 1.8. We believe this Sharpe ratio, which measures the risk-adjusted return of the PRIT Fund, would be among the highest in the country, meaning our portfolio is higher returning relative to our peers even though it has comparatively lower risk, and low cost. PRIM’s strong performance in both up markets such as fiscal year 2018 and calendar year 2017, combined with our strong outperformance in down markets like we had in fiscal year 2016 (nation-leading, positive performance), gives us confidence that our investment program is performing well and as designed.
Organizationally, fiscal 2018 was another outstanding year. One senior-level employee departed, the first such departure in several years, and consistent with the Board-approved hiring plans, we filled six staff vacancies with top talent. We are staffed with exceptional investment and finance professionals, and all our job postings attract literally hundreds of talented and well-qualified applicants. Our team continues to be recognized around the nation for the success and innovation of our investment program and for the transparency and completeness of our financial reporting. Our comparatively small staff researched and deployed approximately $5.4 billion in new Board-approved investments in fiscal year 2018 – a new milestone for PRIM’s productivity.
We have never been stronger or more productive, but retention of key employees remains my primary concern. The employment environment in the nation and in the region is strong – meaning there are numerous opportunities for our employees outside of PRIM – and we have spent considerable time and effort on retention strategies for PRIM employees. We continue to ensure that we provide a challenging and rewarding opportunity for all our employees, and that PRIM continues to maintain a positive culture and working environment that our employees enjoy and value. We owe a great deal of gratitude to our Board and committees for providing the support necessary to advance our investment program and to attract and retain the highly-qualified employees who have created one of the best performing public pension plans in the nation.
We are truly privileged to have volunteers of such high caliber and professional achievement on the PRIM committees and Board, and we recognize that our success is due in large part to the dedication, hard work, and expert oversight of our Board and its four committees.
The American Investment Council ranked PRIM Private Equity #1 in private equity returns among 163 U.S. public pension funds based on 10-year performance. PRIM is the only fund that has been in the Top 5 of all private equity portfolios in every year the American Investment Council has performed the study – including #1 rankings in 2015 and 2013.
In May, and for the 13th consecutive year, PRIM was awarded the Government Finance Officer Association’s Certificate of Achievement for Excellence in Financial Reporting for the completeness and timeliness of our Comprehensive Annual Financial Report.
Michael McGirr, Senior Investment Officer on the Private Equity team, was awarded the Treasurer’s 2018 Citation for Outstanding Performance. Those selected for this honor have made notable contributions to the office of the Treasurer, its agencies and the citizens of MA.
Michael Trotsky, CFA, Executive Director and Chief Investment Officer, was elected Vice-Chair of the CFA Society Boston in late June. In the ordinary course of succession at the CFA, the Board’s Vice-Chair is likely to serve as Chair of the Board in the following year. The CFA Society Boston serves more than 5,700 members in the greater Boston area. Last August, Michael’s 3-year term as a Governor of the CFA Institute ended. The CFA Institute is the global parent of the CFA Society Boston, serving more than 150,000 members worldwide.
PRIT Fund Performance Summary
As of June 30, 2018, the PRIT Fund net asset value stood at $71.8 billion. For the one-year ended June 30, 2018, the PRIT Fund rose 10.0% gross (9.5% net), outperforming the total core benchmark of 8.1% by 186 basis points (140 bps net).
- This performance equates to an investment gain of $6.4 billion, net of fees.
- This outperformance equates to $935 million of value above the benchmark return, net of fees.
- Six of the seven major asset classes outperformed their respective benchmarks.
- Net total outflows to pay benefits for the one-year ended June 30, 2018, were approximately $1.4 billion.
New PRIM Employees
Jennifer Kuhn joined in May as Director of Human Resources. Jennifer was employed for nearly 15 years at Big Brothers Big Sisters of Massachusetts Bay, where she was most recently the Director of Human Resources. She began her career as a portfolio administrator at The Colony Group, and was also the Assistant Director of Development at Horizons for Homeless Children, and holds a bachelor’s degree in Business Administration from Elon University.
David Griswold joined in June as the Director of Information Technology. David has more than 20 years of information technology and communications experience and is joining us after 12 years at The Hancock Natural Resource Group (HNRG) and Forest Capital Partners. During his time at HNRG and Forest Capital, David was responsible for managing an international team of engineers and analysts, covering a variety of technology functions. David holds a bachelor’s degree in Business Management with a concentration in Computer Science from Bentley College.
Sylvia Argiropoulos joined in June as an Administrative Assistant. She will support the Real Estate and Timberland and the Portfolio Completion Strategies teams. Sylvia brings 25 years of administrative experience to PRIM, most recently an Executive Assistant at Ernst & Young supporting its audit and consulting partners. Sylvia has her Associates Degree from Cape Cod Community College.
This summer we are pleased to welcome two interns from the Treasurer’s Women in Finance initiative. Anmei Zhi is working with the Real Estate and Timber team and is a rising junior at Smith College. Isabelle Tabak is working with the Public Markets team and is a rising junior at Babson College.
Additionally, we welcome one intern who joins us from the national program, Girls Who Invest. Alexis Sabbaghian is a rising junior at Boston College and is working with the Private Equity team.
I also want to congratulate Andre Abouhala, Investment Analyst on the Public Markets Team, who earned an MBA from Boston University in May.